Commercial Real Estate

Case Study: How to Give Investors a 9% Cash-on-Cash Return in a Syndicated Apartment Deal

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
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Some of you have me asked questions like, “How is it possible to make a deal with investors not only cash flow but achieve 13%+ returns for the investors? I can’t even seem to make this work with a 10% cap rate!”

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Certainly, when you’re sharing the pie with others, it should be big enough to share. In this article, I want to show you that a 10-cap deal is big enough to share, leaving a good return for you and your investors.

While we should look for deals to which we can add value to (and maybe double the value of the building in 3-5 years), let’s pick a “boring” 10 cap deal with no particular upside. If it works with something like this, then it should work even better with something with an upside.

Let’s Begin Our Case Study

Assume we’re buying a 10-unit apartment building at a 10% cap rate on actual financials. The average rent per unit is $1,000 per month and increases by 3% per year. The historic vacancy rate is 10%. We’ll need $1,000 per unit in renovations. Our expenses will be 45% of income and those will increase 3% per year.

This puts our net operating income (NOI) at just about $60,000. To buy this at a 10% cap rate, we will pay no more than $600,000.

Pretty normal stuff so far, nothing out of the ordinary.

Because we will be syndicating this with a handful of investors, our attorney fees will be substantially higher than a “normal” deal. For example, we need to pay for a “Private Placement Memorandum” (PPM) to comply with SEC securities laws, and that can get expensive (my attorney charges me $6,000 but it’s common to cost more than that). Largely because of this, my estimated closing costs are $41,000, a hefty number, but I use it to be realistic and also to demonstrate that the deal still works even with that kind of expense.

Related: The Benefits and Challenges of a Real Estate Syndication

A Summary of What We Have So Far


You can see that the cap rate is just about 10% and is yielding a cash on cash return of a little less than 12% (given the $230,000 of equity we put into the deal).

Obviously, if you didn’t require investors and you could do the deal yourself, great! But I’d like to show you how this deal can produce a reasonable return for you and your investors, even if you didn’t use any of your own capital.

Let’s say you structured the deal such that the investors get 75% of the building and you gave yourself 25% for putting the whole thing together. (In general, I need the deal to work with me owning at least 20% of the building, otherwise it may not be worth it for me).

Based on our financials above, the net operating income in the first year is $60,000. This leaves about $27,000 of cash to distribute after debt service of $32,000. The investors receive 75% of the cash available after debt service, which is $20,000 or a 9% cash-on-cash return.

So far, this is a GREAT cash-on-cash return for the investors! What about any profits from a re-sale down the road? Let’s assume we sell the building after five years at the same cap rate when we bought it (10%). As we said earlier, our rents and expenses both rise by 3% per year. I plug these numbers into my 5 year financial projections and I see that the NOI will be $67,000 after the 5th year. At a 10% cap, the building’s value is $670,000. Our tenants have paid down about $42,000 in principal during this time. So we’ve added a little bit of value in 5 years (but not much).

Adding together distributions, loan amortization and appreciation, our investors' average annual return is 11%.
This is certainly not an incredible return but consider that this is for an extremely stable asset. Investors today are very interested in investing with you for a stable, compounded return like this. I have found that in general, investors will invest for an 11% to 15% average annual return.

Related: Syndication: Is It Even Worth The Trouble?


I hope I’ve made the point that you can syndicate a “boring” old 10 cap deal with no upside whatsoever.

However, we should strive to and can in fact do better than that!

If we could increase rents by just $100 per unit per month in the second year (and then increasing by 3% after that), our crafty syndicated deal analyzer shows us that the average annual return for the investors jumps to 15%. Now that’s better!

Let’s not forget about ourselves, the hard-working apartment building syndicator. Our boring 10-cap pays us an average of $10,000 per year in cash flow and a little bit at closing. Not shabby for not having any of our own money in the deal and having a property management company run the whole thing.

Questions? Comments?

I’d love to answer questions about making syndicated deals work for your investors as well as for yourself!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Ben Leybovich
    Replied about 6 years ago
    Michael – will you text me the contact for your attorney please? Thanks
    Sharon Tzib
    Replied about 6 years ago
    “Our boring 10-cap pays us an average of $10,000 per year in cash flow and a little bit at closing.” Am I missing something MIchael? 25% of the cash flow in this deal would be $6731.75. Also, is your syndication fee part of the 6.9% closing costs or did you not take one in this example deal? Thanks!
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 6 years ago
    Sharon – you are right, the first year is $6,732 and the average per year over 5 years is $7650 per year. I was looking at the investors’ returns. Good catch! To answer your second question, no, I did not pay myself anything in this deal, and so the closing costs don’t contain an acquisition fee. Thanks!
    jeffrey gordon
    Replied about 6 years ago
    Michael, thanks for the illustration, it was very helpful. Had an issue i wanted to clarify, “The investors receive 75% of the cash available after debt service, which is $20,000 or a 9% cash on cash return.” I assume you are using the $180,000 down payment requirement to get to that cash on cash return? $20,195 (75% preferred return) divided by $231,332 total cash invested is closer to 8.7% cash on cash return. Which is nothing to sneeze about. My model shows a before tax IRR of about 14.5% for the project. Michael what market are you buying that 10 cap in? thanks jeffrey
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 6 years ago
    Hi Jeff … your 8.7% number for the cash on cash return is correct, I just rounded to 9% ! It’s hard to buy at a 10 cap around here (Washington DC) – I used a 10 cap mainly to keep it simple. However, there are deals in Baltimore that one can buy at a 10 cap of existing financials. If I can’t buy at a 10 cap on actuals I’d like to get there within one or two years to give me a chance to increase rents and/or decrease expenses to build value.
    jeffrey gordon
    Replied about 6 years ago
    thanks Michael, just wanted to make sure they investors were putting up all the cash and not you covering closing costs etc. My son owns some rental property in DC, I have wondered what type of cap rates he might find some smaller MF in DMV region that he could syndicate as he grows his business. Baltimore is probably a little far for him to support right now. thanks again for the model. j
    Replied about 6 years ago
    Micheal, if you have an investor that just ant to give you a lump sum of money and charge you monthly 6% interest for it with 2 years ballon ? With that case assume that you can buy an apartment cash. Assume he is not part of the deal when we go and buy the property. Would that be a better deal as I will get a bigger cash on cash return ?
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 6 years ago
    James – Structuring an investment like this (a simple loan) is the easiest way to structure a deal. Just make sure the deal supports the additional debt service/interest. If it’s a balloon note and you only need to make interest that will probably work all day long. In general, if you can find this kind of investor, this is a great way to use a partner. Seller-financing BTW works just like this and is the best kind of “investor” you can have in this regard. To repay the balloon note you would hopefully be able to re-finance. Many investors may not be happy with that kind of return, but some may very well be!
    Tony Yeoman
    Replied about 6 years ago
    Great walkthrough Michael. Are the numbers you used based on what you are actually seeing in your market, or just used for the sake of the example. Specifically I am wondering about the closing costs and expenses. The closing costs seems high, especially without taking the acq fee into account. I am in Florida and I would do a backflip if I could find a good Class C property that is truly a 10 CAP. Thanks.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 6 years ago
    No, a 10 cap is rare in the Washington DC area, though in Baltimore you have a shot. I used a 10 cap primarily as an example. The closing costs are pretty high because I included about $12,000 in attorneys fees for the private placement memorandum and operating agreement to structure the deal and be compliant with SEC regs. But you know what? I’ll take your question as input for another article, which is to talk about estimating closing costs, rules of thumb etc because that is often overlooked (and under-estimated) by investors. Thanks for the question!
    Joseph Ball
    Replied about 6 years ago
    I have been looking very hard for a TEN CAP RATE class A apartment deal anywhere in SOUTHEAST , for months. Cannot find anything above six point five. Where should I go? I have ten million.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 6 years ago
    Joseph – I don’t invest nationally (yet) so I can’t give you a first-hand-experience answer. IN general, though, Class A apartments will be nearly impossible to get a 10 cap. You’ll have to venture into B and C territory and/or go into tertiary (i.e. suburban/rural) areas. But Just yesterday I spoke with one of my investors who relocated himself to North Carolina to do some apartment building investing himself, and he said 10 caps exist. Anyone else on this question? (you might also want to post your question to the forums).
    Brian Burke
    Replied about 6 years ago
    10 caps do exist, but so does Big Foot and the Loch Ness Monster. A lot of people say they’ve seen them but no one has conclusive proof. All kidding aside, I think there are two ways to find 10 caps. One is to buy an off-market deal from a very motivated seller who isn’t looking at any offers other than yours. The other way is to underestimate the expenses or overestimate the income such that the resulting calculation results in a 10 cap which will last until you see your actual income statement in the future and wonder what the heck happened to your 10 cap. This happens a lot in class-D deals, and probably explains why you sometimes see the same property cycle through foreclosure every few years. That said, I think Michael’s point is valid, that deals can be syndicated where the investor receives a favorable risk-adjusted return without needing an unrealistically high cap rate. It’s not so easy with Class-A properties, but certainly doable in the B&C space. The benefits of leverage coupled with capital growth can allow a 7-cap property to deliver IRRs in the teens (or more) to capital investors while still allowing the syndication sponsor to earn a living. In my experience, however, this only works if there is an up-front value-add component to the deal.
    Frankie Woods Investor from Albuquerque, NM
    Replied over 5 years ago
    What a great example for us newbies! I’m building up my track record now to be able to show investors my experience. This will definitely help me develop my package for my presentation! Thank you! I can’t wait to get started with syndication!
    Paula Derie from Port Charlotte, Florida
    Replied almost 5 years ago
    Are you using a software calculation program to crunch all of these numbers fast? Can you tell me what? thanks.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 5 years ago
    Hi Paula – yes, I’m using my Syndicated Deal Analyzer spreadsheet software which also comes with 90 minutes of training videos to make you an apt deal analyzer rock star -;) Just Google it to find it (BP discourages open product promotion, sorry I have to make you work for it a bit -;)
    Darren Sager Investor from Summit, NJ
    Replied almost 5 years ago
    Great article Michael! Even now more than a year later it still makes sense and is a great example for all to learn from.
    Karen Young
    Replied almost 3 years ago
    How are investors’ returns taxed? I’m interested in this model but it seems being able to use depreciation to shield returns from taxes is more appealing.
    Thomas Fawole Wholesaler from Brooklyn, New York
    Replied almost 3 years ago
    Great article! Thank you, Michael.
    Calvin Lipscomb from Brooklyn, New York
    Replied over 2 years ago
    Christine Sterling from Omaha, Nebraska
    Replied over 2 years ago
    Hi Michael, Does a 10 Cap property with a cash flow of over 500K annually sound possible to you? Is financing difficult for 10 cap properties?